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LCFS - A Refiner’s View from Afar - Turner, Mason

lcfs - A refiner s view from Afar OPIS 4th Annual lcfs Workshop December 10, 2015 San Francisco, CA Thomas Hogan, Senior Vice President International consulting practice since 1971 Downstream focus; refinery/chemical engineers Provides engineering and management consulting services to clients in the downstream segment of the oil industry Publish a variety of Outlook and multi-client subscription reports Assist clients in fuels compliance, including renewable fuels Areas of expertise relevant to this topic include: Fuels Regulations and Compliance Supply/Demand/Pricing forecast in semi-annual Crude and Refined Product Outlook Turner Mason & Company 2 Agenda Overview of the Refining Industry The lcfs Program lcfs Compliance Compliance Challenges What Does the Future Hold?

LCFS - A Refiner’s View from Afar OPIS 4 th Annual LCFS Workshop December 10, 2015 . San Francisco, CA . Thomas Hogan, P.E. Senior Vice President

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Transcription of LCFS - A Refiner’s View from Afar - Turner, Mason

1 lcfs - A refiner s view from Afar OPIS 4th Annual lcfs Workshop December 10, 2015 San Francisco, CA Thomas Hogan, Senior Vice President International consulting practice since 1971 Downstream focus; refinery/chemical engineers Provides engineering and management consulting services to clients in the downstream segment of the oil industry Publish a variety of Outlook and multi-client subscription reports Assist clients in fuels compliance, including renewable fuels Areas of expertise relevant to this topic include: Fuels Regulations and Compliance Supply/Demand/Pricing forecast in semi-annual Crude and Refined Product Outlook Turner Mason & Company 2 Agenda Overview of the Refining Industry The lcfs Program lcfs Compliance Compliance Challenges What Does the Future Hold?

2 3 Refining Overview 4 Data from EIA *Refineries 20 MBPD or greater PADD II 25 Refineries* Million BPD PADD V 23 Refineries* Million BPD Total 111 Refineries* Million BPD PADD I 7 Refineries* Million BPD PADD III 44 Refineries* Million BPD PADD IV 12 Refineries* Million BPD refining system largest in the world Divided into five geographic regions: California Represents the Majority of PADD V Refining Capacity ( Million BPD) West Coast Refining California has three distinct refining regions San Francisco/Bay Area Central California Los Angeles Area Washington State has four major refineries in the north Total capacity 590 Thousand BPD Supply WA, OR and BC Washington: 5 Refineries 590 Thousand BPD California: 12 Refineries Million BPD 5 Los Angeles: 6 Refineries Bakersfield: 1 Refinery San Francisco.

3 5 Refineries Refining Complexity Refineries vary by complexity More complex refiners have additional processing units and increased processing capabilities This allows for more complete processing of crude oil, including heavy crudes, into clean products California refiners are more complex on average than typical or global refineries Simple Light Crude Refinery Complex Heavy Crude Refinery A V A V Total Upgrading Cat Cracking Coking Hydro- cracking 56% 31% 15% 11% PADD 5 66% 29% 18% 19% California 81% 35% 23% 23% Asia 19% 13% 3% 6% Europe 26% 14% 3% 9% World 28% 16% 5% 7% 6 The Importance of Pipelines West Coast lacks integrated product pipeline network that is prevalent in rest of Geography and policy have isolated the region This has had important implications for the region 7 No Connections to Outside States Major Product Pipelines Supply and Demand

4 California demand has remained relatively flat over last decade Gasoline/diesel ratio one of the highest in the country lcfs burden falls harder on consumers; diesel is a predominantly commercial fuel Ratio 1200140016001800200022002400020040060080 0100012002005200620072008200920102011201 2201320142015 YTDR efinery Capacity (MBPD) Fuel Production (MBPD) Refinery CapacityCARB GasolineCARB Diesel8 Agenda Overview of the Refining Industry The lcfs Program lcfs Compliance Compliance Challenges What Does the Future Hold? 9 lcfs Program A refiner s view Objectives of program from a refiner s view Reduce petroleum product use in California transportation fuels Program designed to reduce carbon intensity in transportation fuels used in California The purpose of this regulation is to implement a low carbon fuel standard, which will reduce the full fuel-cycle, carbon intensity of the transportation pool used in Progressive reduction of the average carbon intensity of fuels relative to baseline 10 lcfs Program Scope lcfs regulations apply to all producers or importers of on road transportation fuels.

5 Or Downstream parties who have accepted the obligation from others up stream 11 lcfs Program Design Petroleum producers and importers transfer funds to alternative energy providers based on a credit/deficit system Petroleum supply generates deficits Alternative fuels generally generate credits Credits/deficits are based on the gCO2e emissions calculated for the fuel Increasingly tighter targets will incentivize increasing volumes of lower carbon intensity fuels into the market 12 Natural Gas Fossil-based and Bio-based CNG/LNG Fuels Subject to Regulation 13 Any Other Liquid or Non-liquid Transportation Fuel Diesel CARB Diesel Biodiesel (and blends) Electricity Battery and Partial-hybrid vehicles, Electric Rail Hydrogen Compressed/Liquid H2 Fuel Blends Containing Hydrogen Gasoline CARB Gasoline Ethanol (and blends) lcfs 13 Credit Balancing Act 14 Refineries Supplying CARB Gasoline and Diesel Imported Petroleum Gasoline and Diesel Hydrogen Methane Gas (CNG/LNG) from Bio Sources Electric Forklifts Innovative Crude Oil Production Refinery Emission Reductions (For Own Use Only) Low Complexity/Low Energy Refineries (For Own Use Only)

6 Electricity Used for Transportation Renewable Diesel Biodiesel Some Forms of Ethanol Deficit Sources Credit Sources Average Carbon Intensity Average intensity targets have been revised twice since the program began, once in 2012 and again in 2016 Result has been delay in reductions, with sharper reductions in later years for gasoline Targets frozen at 2013 level for 2014 & 2015 by court order 8085909510010520112012201320142015201620 17201820192020 Carbon Intensity (gCO2e/MJ) Gasoline (or substitutes) InitialRevisedLatest (2016)8085909510010520112012201320142015 20162017201820192020 Diesel (or substitutes) 15 Selected Carbon Intensities Over time, regulated parties will be required to incorporate increasing volumes of low carbon fuels, or purchase credits in order to comply with target average CI -40-20020406080100120CI (gCO2e/MJ) *CI reported is effective CI after accounting for EER adjustment factors 16 Agenda Overview of the Refining Industry The lcfs Program lcfs Compliance Compliance Challenges What Does the Future Hold?

7 17 Deficit Calculation The deficits are based on the difference between the petroleum component of gasoline and diesel and the declining mandate The difference between petroleum gasoline and diesel and the targets in 2013, and respectively, grow to and in 2020 Although the CI only declined 10%, the projected deficit in 2020 is over 6 times more than the projected deficit in 2015 18 - 5,000 10,000 15,000 20,000 25,0002011201220132014201520162017201820 192020 Thousand Metric Tons lcfs , Actual and Projected Deficits, CO2e Actual Projected Reduced Petroleum Demand, sugarcane ethanol and biodiesel used to reduce CI Fixed Petroleum Demand 19 Additional Sugarcane Ethanol & Biodiesel In my example, the gasoline CI reductions were attained by using sugarcane ethanol and the diesel CI reductions were obtained by using biodiesel In 2020, about 349,000 barrels per day (about billion gallons, ethanol content of about 34% in the 2020 gasoline pool) of sugarcane ethanol would be required to reduce the CI of the petroleum gasoline consumption In 2020, about 59,000 barrels per day (about 1 billion gallons, about 24% of the diesel pool)

8 Of biodiesel would be necessary to reduce the CI of the petroleum diesel consumption Current renewable fuel component of the transportation pool for ethanol and biodiesel in gasoline and diesel is about 10% and 3-5% respectively 20 Energy Replacement Implications The alternative energy replacement choice will have an impact on how much the petroleum portion will decrease For instance, the two choices for gasoline and diesel replacements to reduce the CI of the pool had CIs in the mid 50s while the petroleum CIs are set by the legislation at around 100 gCO2e/MJ The lower the CI of the alternative fuel, the less the reduction in the petroleum portion 21 0%5%10%15%20%25%30%35%40%010020030040050 060070080090020162017201820192020+% Renewables in Pool Consumption, Thousand BPD Petroleum GasolineEthanolPercentageGasoline Balance (Constant Energy Basis, All Sugarcane Ethanol) 22 0%5%10%15%20%25%050100150200250300201620 17201820192020+% Renewables in Pool Consumption, Thousand BPD Petroleum DieselBiodieselPercentageDiesel Balance (Constant Energy Basis) 23 587 452 317 59 0100200300400500600700800900100020132014 201520162017201820192020 Thousand BPD E10 (Corn Ethanol)E85 (Sugarcane Ethanol)

9 Sugarcane EthanolCorn EthanolUse of E85 to Balance Deficits Most Gasoline today blended with corn ethanol Transition to lower CI sugarcane ethanol will be required to meet targets 2016 CA requirement would require 54,000 BPD of sugarcane ethanol, currently total CA ethanol imports peaked at 8,000 BPD in 2013 (7,000 from Brazil) and averaged <1,000 BPD in 2014 and 2015 By 2020, CA would need to import >75% of Brazil s ethanol production Assumptions: - Constant Energy Basis 950,000 BPD E10 Gasoline - Existing E10 is blended with Corn Ethanol (10 vol% Ethanol) - E85 is blended with Sugarcane Ethanol (70 vol% Ethanol) 24 E85 Challenges At end of 2014, California had million registered automobiles* As of 2010, about 400,000 flex fuel vehicles exist in CA ( ) CA Energy Commission projects million by 2020 Assuming constant vehicle numbers, that will be <18% of all vehicles To balance credits, 452,000 BPD of sugarcane E85 must be sold >40% of gasoline pool in 2020 In 2012, CA E85 sales averaged 334 BPD.

10 A 135,000% increase is required Major rollout of E85 across state, coupled with pricing correlated at or below energy content basis to gasoline will be required 87 E85 Stations in California (~10,000 total stations in 2012) 2686 E85 Stations Across (~150,000 total stations in 2012) *Excludes commercial vehicles, motorcycles, etc. 25 Why lcfs Deficits Grow So Quickly The lcfs targets for 2013 through 2015 were frozen at 2013 levels Based on the 2013 version of the regulation, the deficits for 2014 and 2015 would have been as shown below Original Target gCO2e/MJ Deficit Thousand MT CO2e Gasoline Diesel Calculated Recorded 2013 2,400 2,400 2014 3,500 2,450 2015 (estim)


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